Gas Has a Big Future to Live Up To

A lot of numbers relevant to exploration were discussed at the recent AAPG Annual Convention and Exhibition in Denver, and the most startling might have been “10.”

W. David Montgomery, a vice president at Charles River Associates in Washington, D.C., gave the presentation “Climate Policy: Prospects and Impacts on Oil and Gas.”

He said an additional 10 trillion cubic feet of natural gas production and consumption annually in the United States would have a major impact, cutting greenhouse gas emissions by 840 million metric tons, or about 12 percent of the current total.

That’s right: An additional 10 Tcf.

The number is a mind-boggling thought, for several reasons.

First, you can argue that the United States has not had any increase in gas production for almost 40 years.

The U.S. Energy Information Administration (EIA) estimated total domestic dry gas production at 21 Tcf in 1970. Since then, annual U.S. gas production has been mostly in the 17-19 Tcf range – and only recently, with the advent of unconventional gas, moved above 20 Tcf again.

Second, domestic gas production is projected to decline this year by as much as five billion cubic feet a day.

Because of lower oil and gas prices, the U.S. rig count has dropped to less than half of its high a year ago.

Third, there are no new technologies or new gas sources on the near horizon that would indicate such a dramatic increase.

Montgomery was talking about the 2010-50 time frame, leaving plenty of time for breakthroughs.

But if we’re going to see a meaningful increase in U.S. gas production at some point, how much will it be – and how will we get there?

Positive Signs

“If we keep the focus on technology and continue to develop these gas shales and tight gas sands and so on, production will grow,” said Kent Perry, director of E&P research for the Gas Technology Institute in Des Plaines, Ill.

Perry said GTI foresees a fairly steady increase in U.S. gas production going into the future, led by higher demand.

The latest EIA energy outlook also projects an increase in gas production.

Its reference case puts annual U.S. production at 23.6 Tcf by 2030. With more favorable conditions – rapid development of technology and higher than anticipated natural gas prices – that number could reach 25.34 TCF, it said.

“Unconventional natural gas is the largest contributor to the growth in U.S. natural gas production, as rising prices and improvements in drilling technology provide the economic incentives necessary for exploitation of more costly resources,” according to the outlook summary.

In the reference case projection, “unconventional natural gas production increases from 47 percent of the U.S. total in 2007 to 56 percent in 2030,” it said.

Central to the projection of higher production is an increase in U.S. demand for natural gas. That could get an assist from governmental restrictions on CO2 production, which will tend to favor gas consumption.

But new carbon-emission laws and regulations might do little to affect domestic exploration and production, said Eddie Thomas Jr., EIA operations research analyst in Washington, D.C.

“They mostly change demand, which kind of affects us indirectly,” he said. “I don’t know how much that would change our model on the production side.”

Thomas served as analyst for oil and gas production for the EIA outlook. He said the agency is required to base its projections on existing legislation, but has started to take the possibility of carbon-emission restrictions into account.

“Because we don’t have an actual policy in place, we have to assume existing laws and legislation,” Thomas said.

“We did make an assumption this year for the first time for what we call a ‘carbon risk premium,’” he added.

That risk is influencing behavior as “investors see something coming down the road,” Thomas explained.

The effect is already showing up in a reluctance to build new, coal-fired electrical power plants in the United States.

Other Factors

One significant contributor to gas production would be completion of an Alaskan gas pipeline.

The current EIA outlook assumes a gas line from Alaska will be operational by 2020, and will lift the state’s gas production by 1.6 TCF per year as a result.

“This is partly based on economics, but it’s mostly a model assumption,” Thomas said. “We have no idea when it’s going to happen. It’s up to the operators in Alaska to reach an agreement.”

In fact, an Alaskan gas line has been in the plan for years, he noted. The projected completion date simply has been pushed back as operators and Alaska’s state government have waffled and veered on details.

Net imports of gas decline in the EIA projection as domestic production increases, but LNG is something of a question mark. The outlook shows LNG imports rising to 1.5 Tcf in 2018 and then falling below one Tcf later.

“LNG is kind of a kicker. It’s an additional supply source that will knock out some domestic production,” Thomas observed.

“We see the capacity to take up to five Tcf (per year) of LNG domestically. Is that likely to happen? We think it’s not likely to happen,” he said.

In the outlook, gas prices are a bad-news/good-news story for the industry. The price doesn’t exceed $8/Mcf out to 2030, in constant 2007 dollars. There’s no return to the exceptionally high prices at the top of the gas market in recent years.

“In terms of a long-term trend, we don’t expect to see those price levels again,” Thomas said. “That’s mostly a matter of supply and demand balancing.”

The good news is that $8/Mcf gas is much better than current prices. And in nominal dollar terms, gas prices are forecast to rise above $10/Mcf in later years of the outlook.

Needed: Top Technology

Undeniably, technology will have to play a major part in any increase in domestic gas production. That includes new technologies in addition to predictable increases in efficiency in applying current technologies.

Perry said GTI has been working on research to improve effectiveness and increase applications of coiled-tubing drilling.

“The long and short of it is, by using coiled tubing and designing a drilling rig that can move quickly and take advantage of the technology, there are seven or eight benefits that accrue,” he said.

“The bottom line is you can now drill a 3,000-foot well in one day” with coiled tubing, he noted.

Use of coiled tubing already has established a commercial foothold in wells to 5,000 feet in depth, Perry said. Advances in the technology should enable more use for faster, cheaper, deeper wells.

Because coiled tubing is light and flexible, it’s not ideally suited for horizontal drilling when weight-on-bit is required.

GTI and others have conducted research into laser-bit drilling that can be used downhole in coiled tubing-drilled wells.

“That’s a little bit longer term, but the goal is to cut rock using laser energy and that precludes the need to put weight on the bit,” Perry noted.

He sees a bright future for coiled tubing and associated, emerging technology.

“It’s going to go a long way toward producing some of the marginal gas areas in the future,” he said.

One area of technology that could open up a new gas source is improvement in production of gas hydrates, principally clathrate hydrate methane trapped in marine sediments.

A joint government-industry project recently identified heavy concentrations of gas hydrates in porous, permeable sands in the Gulf of Mexico.

“It’s obviously a big potential source. It has been worked on for years by the Department of Energy, and we’ve been doing a little work on it,” Perry said.

“That resource does not come into the picture for another 25 years or even longer than that time window, due to its complexity, its location, its difficulty to market,” he added.

Future Shock?

Looking forward, an additional five Tcf of annual U.S. gas production should be within reach. The following could move production numbers even higher:

New technologies that go beyond efficiencies in applying current technology.

Gas prices high enough to sustain moderate-to-high levels of drilling activity and open new areas of production.

A completed gas pipeline from Alaska and continued build-out of the U.S. gas transportation infrastructure.

Increased demand from an improvedeconomy –something almost sure to happen, although the question is, when?

Carbon-emission regulations and limits that favor the use of natural gas, especially for generation of electricity.

Also, it’s not completely impossible to think the United States could adopt a strong national energy policy, one that will encourage the development, production and use of its domestic natural gas resource.

In that case, the industry could forget the tired joke, “Natural gas is the fuel of the future – and it always will be.”

Instead we’d have to say:

“Natural gas is the fuel of the future. And it will be for a long time.”